December 10, 2012

On Friday, the U.S. Court of Appeals for the Federal Circuit reversed an Eastern District of Texas federal judge on a sanctions issue, finding that the trial judge used the wrong standard in deciding to deny the defendants’ Rule 11 sanction motions against a plaintiff in a patent case.

The background to the Dec. 7 decision in Raylon v. Complus Data Innovations Inc., et al., is as follows, according to the Federal Circuit’s opinion: Raylon filed complaints against three defendants, alleging they infringed on a patent for a hand-held ticket-issuing system. The defendants later sent several letters to Raylon expressing concerns that Raylon’s complaints violated Federal Rule of Civil Procedure 11(b)(2) and 11(b)(3) because, they argued, the plaintiff’s claim construction positions were unsupportable by intrinsic evidence and the asserted claims were unreasonable. Rule 11 generally requires attorneys filing pleadings to conduct a reasonable inquiry so they can verify that the pleadings are “not being presented for an improper purpose,” “the claims . . . are warranted by existing law or a nonfrivolous argument” and the “factual contentions have evidentiary support.”

Raylon disagreed, the opinion continues, maintaining that the patent supported broad claim construction and that the accused products infringed each and every claim of the patent. The defendants later filed for Rule 11 sanctions in the case. The trial court rejected Raylon’s claim construction, noting that it “stretch[es] the bounds of reasonableness beyond what I am willing to accept,” accepted the defendants’ construction and granted summary judgment in their favor. The trial court rejected the defendants’ motions for Rule 11 sanctions.

In making his analysis, the trial judge found that while Raylon’s claim construction arguments stretched the bounds of reasonableness, “they do not cross the line,” wrote the Federal Circuit. The trial court also analyzed Raylon’s settlements and its damage model to determine whether Raylon filed the suit to “recover nuisance value settlements.” The trial court found the plaintiff’s damage model was “not large for a patent case,” suggesting that Raylon’s “earlier settlements were not so unreasonable as to indicate that Raylon believed its case was weak or frivolous.”

After the trial court issued its final judgment, the defendants filed motions for attorney fees and costs, which the court denied. The defendants appealed the denial of Rule 11 sanctions and of attorney fees and costs to the Federal Circuit.

In its decision, the appellate court found that the trial court did not use the proper standard as set forth in decisions by the 5th U.S. Circuit Court of Appeals.

“The Fifth Circuit ‘has been emphatic’ that Rule 11 analysis is a strictly objective inquiry and ‘expressly rejected any inquiries into the motivation behind a filing.’” wrote Judge Sharon Prost, in a decision joined Judge Kimberly Moore.

The panel reversed the trial court’s holding that there was no Rule 11 violation and ordered the judge to determine “a proper sanction.”

The court also remanded the case to consider the motion for attorney fees and costs under 35 U.S.C. §285 to determine whether the case is “exceptional.” A case is exceptional under that rule if, absent litigation misconduct or misconduct in securing a patent, the litigation is “brought in subjective bad faith” and the “litigation is objectively baseless.”

Judge Jimmie Reyna wrote a concurring opinion noting: “I deviate slightly from my colleagues in the majority in that, given the record in this case, I would reverse and declare this an exceptional case and limit the remand to determination of appropriate sanctions.”